The Advantages and Disadvantages of Debt Consolidation

When you look at the amount of debt you have, what do you think? Is it manageable, or does it make you feel as though you’re sinking further and further beneath it? If it’s the latter, you might benefit from debt consolidation. This means taking out a loan that would cover all the debt you currently have and ensure you have just one monthly payment rather than several. There are a number of advantages to doing this, but it’s also important to understand the disadvantages, so you have a full picture of what you are entering into. Read on to find out more.

 

Advantages Of Debt Consolidation

One of the biggest advantages of a loan for debt consolidation is that you should find your debt is easier to manage. Using the new loan, you could pay off some of your existing loans and credit cards and just have one repayment to make each month. This should allow you to manage your money in a much less stressful way.

 

You might also be able to cut your interest charges with a debt consolidation loan. Right now, you probably have a variety of different interest rates. With this kind of loan, you’ll only have one interest rate to take care of, and often it will be lower than the rates you’re currently paying, allowing you to save money in many cases.

 

A debt consolidation loan can also help to boost your credit score. Debt consolidation can improve your credit utilization ratio. It can also give you a chance to establish a consistent on-time payment history over time.  When you have a better credit score, you can get better rates on a mortgage or car loan – essentials, in other words.

 

Disadvantages Of Debt Consolidation

It might sound as though obtaining a debt consolidation loan is the ideal solution to your money problems, and as we’ve seen, it does have certain advantages. However, it would be unwise to dismiss the disadvantages that you might come across. Read on to find out more about them.

 

To begin with, there is always the temptation of putting new charges onto a newly paid-off credit card. When you are in the habit of using a credit card, it can be hard to stop, even with a debt consolidation loan to help you. This will mean that you will be paying off the card as well as the new loan, which can be much more expensive than it was before.

 

Another issue is interest. Although it is possible – and ideal – to get a debt consolidation loan with lower interest rates than most or all of your current borrowing, it might not always be possible. If you have a bad credit score, you might find that the loan offers the same interest rates or higher ones.

 

Debt consolidation may lower your interest rate or monthly payment, but be sure to consider origination fees and the length of repayment, which can offset the savings or even increase the total you pay over the life of the loan. There might also be additional fees when you take out a debt consolidation loan. Sometimes you will have to pay an arrangement fee or pay for debt counseling services. This can add to the overall cost and make the option a much more expensive one.

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